Gaming Compliance

Article originally appeared in Gaming Management on 2/15/08

Gaming Compliance

What is a casino license worth? To a gaming company, the answer is simple: everything. Without a gaming license, the company’s ability to earn revenues is exhausted. Regulatory compliance programs are simply an insurance policy for the company’s future. As gaming continues to expand, the future success of certain companies to earn either licenses or franchises could be directly tied to the company’s regulatory history. Companies with substandard compliance records could find themselves disadvantaged when they attempt to secure rights in or licenses from new jurisdictions. After all, the best predictor of a company’s future compliance is its past. Moreover, a good compliance program can literally save the company from the industry’s version of the death penalty — the revocation of its gaming license after a disciplinary action.

A compliance program is an internal program adopted by a casino company to assure compliance with all laws and regulations. For casino companies, the program has a particular emphasis on gaming laws, regulations and general regulatory policies. Successful compliance plans embody the commitment of the company to regulatory and legal compliance and focus on preventing regulatory violations before they occur. They identify areas of concern that might adversely affect the licensee’s reputation. They minimize the risk of being the subject of criminal or regulatory action and maintain the company’s reputation in the public markets. In the unfortunate circumstance that a company does find itself faced with criminal or regulatory problems, the demonstration of a compliance program and a commitment to that program can serve as a mitigating circumstance.

Regrettably, many casino companies, senior staff members and boards of directors simply have little knowledge of the compliance function and, therefore, lack a commitment to the compliance process. More often than not, upper management will rely on persons under them to understand the basic objectives of gaming laws and how they apply to the business. The resulting decisions are thus recklessly based on what upper management may perceive as “acceptable” or “standard” in the industry. What’s more, there is a false expectation that compliance is the responsibility of the regulators. This is simply not possible. Regulators do not have the resources, institutional knowledge, motivation or corporate cooperation required to create an effective compliance program.

Implementation and Maintenance

Compliance is a duty of the casino companies. This commitment starts with prioritizing compliance among the company’s objectives. The company should undertake an assessment of its infrastructure and organization to understand current capabilities. Where regulatory voids exist, they need to be addressed in the compliance structure. The company also needs to survey its current business activities and past compliance history to detect potential problem areas. Past compliance issues may require a special assessment of needs to be considered in investigation, monitoring or reporting. Often a good place to start is to consider past disciplinary proceedings or issues that may have arisen during the course of the licensing investigation. The company should also survey compliance programs and successes within the industry. While much of the substance of a compliance plan may be derived from regulatory requirements or review, the better compliance programs are proactive as opposed to reactive. A review of disciplinary issues faced by other casino companies may suggest the need for additional diligence in those areas.

Compliance should be implemented through employee training, program monitoring and enforcement. The methods of communication may differ depending on the size of the company. Compliance should not be seen as a “one size fits all” concept. Smaller companies may effectively communicate requirements informally, while larger companies may need to institutionalize the method of communication. Methods of communication may include the orientation of new employees, employee newsletters, pay stub messages, posters, public recognition for ethical behavior, and ethical reviews during performance evaluations and promotion considerations. Employees also should be provided with disseminating publications that explain in a practical manner what is required, as well as provide the name and contact number of the compliance officer. The compliance program should account for each role within the company and the separate duties and responsibilities they entail. For instance, cashiers need instruction on certain subjects and casino hosts on others, while accounting reviewers need a third type of training. Moreover, compliance should not be seen as a one-time event.A constant review of industry practices may augment an existing compliance plan. Training courses should occur on a periodic basis to refresh the understanding of compliance fundamentals, introduce changes in gaming laws and regulations, and address the impact of the compliance program and any emerging issues resulting there from.

Attributes of a Compliance Program

A good compliance program is strong, well reasoned and tailored for the individual company. The program should be in a written, transparent format, explaining how the company will implement the plan. It should begin with a general statement of the corporate policy and go on to detail the strengths and weaknesses of the existing company infrastructure, any specific compliance issues or problems, and the like. The program should be continually updated to meet new regulatory requirements, changing environments and new regulatory challenges and problems. Although the contents of each compliance program will differ based on the size of the company and the nature of its operations, certain due diligence procedures are standard. These safeguards ensure that the licensee does not associate with unsuitable persons who might tarnish its reputation. Such procedures include the screening of consultants, lobbyists, suppliers, vendors, distributors, advisors, lessees and tenants; the screening of employees for past criminal and regulatory transgressions, past violations of corporate compliance plans, and any misleading or false information of application; and the screening of all material financings (such as significant debt or equity),material transactions (such as joint ventures, partnerships, major acquisitions or other strategic alliances), and any material litigation against the company or its employees. The company’s code of conduct is often addressed within the compliance program. A code of conduct details the organization’s values on certain ethical and social issues. Such issues include campaign contributions, advertising and marketing policies, conflicts of interests, business ethics, securities issues (including insider trading and false or misleading disclosure), and anti-trust issues (such as price fixing and concerted refusals to deal). Each of these issues has the potential to tarnish the company’s reputation if managed incorrectly. However, by interlacing the company’s code of conduct with the compliance program, an extra safeguard is established to ensure the licensee abides with all laws and regulations, and maintains the integrity of the company. An internal reporting system is also typically established as part of the gaming compliance and reporting program. The system is designed to detect any criminal conduct by its employees or other agents and requires the licensee to immediately report to gaming authorities any and all violations of the compliance plan. Self-reporting demonstrates to employees, prosecutors and investigators that the provider is committed to building a culture of compliance. Furthermore, federal sentencing guidelines require the company to have in place, and publicize, a reporting system whereby employees and agents can report criminal conduct by others within the organization without fear of retribution. The success of this reporting system depends on coordination and cooperation between the various departments within the company, such as corporate planning, development, acquisition, human resources, procurement, finance, legal, audit and sales, whose business functions may give rise to compliance review issues. Moreover, employees should be made aware of the importance of remaining vigilant and reporting violations. Gaming businesses should therefore include compliance behavior as an element of employee evaluation for promotion, bonus and salary decisions. Conversely, bad compliance behavior should result, when warranted, in disciplinary action. Several quick, convenient and economical means exist by which self-reporting can be effectively implemented within the company. A suggestion box or online website perform this function and can be monitored weekly. An employee ombudsman, who will maintain the anonymity of employees who report issues, can be assigned within the company. A telephone hotline with a voicemail system is equally effective. Indeed, this latter method of self-reporting is included in model corporate compliance programs issued by several federal agencies.

Casino Personnel

For all this to work properly, the company needs to create and delegate clear authority for each group within the compliance structure, including the compliance officer, the compliance committee, senior management, employees and the board of directors.The company must surround itself with dedicated personnel, the most important of which is the compliance officer.The compliance officer is responsible for overseeing the implementation and administration of the company’s compliance programs and internal reporting system. She will interact with the company’s management in order to determine situations that require reporting under the internal reporting system and review by the compliance committee. She will conduct and coordinate mandatory background investigations of all areas of which the compliance plan requires mandatory review, including prospective management and key employee hiring, review of suppliers and vendors, and material litigation. She will intake and gaming management law coordinate the review and investigation of business practices that may constitute unsuitable methods of operation, employee-reported violations, criminal investigations of or involving the company or management, and the like. She will also document all activities and prepare all reports for the compliance committee as required by the compliance plan, and be otherwise helpful in the compliance process. The compliance officer must have a proper background. She must be familiar with the laws that govern the casino operation and understand gaming regulators’expectations regarding the proper conduct of a casino licensee. She must have knowledge of the company’s structure, including the functions of parent, affiliate and subsidiary companies, and the administrative skills to coordinate compliance across various departments. She must have the ability to conduct employee training, document all compliance activities and functions, and coordinate internal investigations. The compliance officer must receive sufficient training and be adequately re-numerated for her services. She must be provided with the necessary resources required to conduct her job and to ensure there is inter-departmental and management cooperation with regard to the compliance program.The compliance officer should be brought in early on all potential transactions.This allows all necessary due diligence reviews to be conducted before transactions are finalized. The compliance committee consists of three to five members. It generally is comprised of the CEO, the president and at least one outside person.The members of the compliance committee are appointed by, and serve at the will and pleasure of, the company’s board of directors, subject to any required approvals from the gaming authorities.The compliance program delineates the procedures that the company will employ in selecting and appointing the committee, as well as the procedures that govern the duties and responsibilities of the committee. The committee usually meets at least quarterly to review reports and other information provided by the compliance officer.The committee is expected to digest and act on source materials, such as original complaints, police reports, employment applications and the like; independent material, such as background investigations and detailed minutes of past committee hearings (including compliance-related decisions and decisions as to why an investigation was terminated); and the report of the compliance officer.The committee is expected to make specific and clear recommendations to management on how to handle particular circumstances — from hiring and firing decisions to the acceptability of entering certain gaming markets.The committee prepares and submits to the board of directors, or an equivalent body designed by the compliance plan, a periodical report summarizing its activities and decisions. The members of the compliance committee should be individuals who, by virtue of their familiarity with the law and the business activities of the company, are sensitive to the concerns of the gaming authorities and are capable of determining the existence or likelihood of an unsuitable situation that could adversely effect the casino company’s reputation.The committee must understand both the gaming business and the regulatory process and objectives.The committee needs to have the cognitive ability to assess situations and proffer recommendations that meet regulatory objectives while having the least impact on business operations. The board of directors is responsible for appointing the compliance officer and supervising the compliance committee.All reports generated by the committee through the compliance officer are submitted to the board of directors for approval by the chair of the board.The board has discretion to change, modify or update the plan as it deems necessary.The board bears primary responsibility for the compliance plan and the actions taken by management.The compliance plan will remain in effect until such a time that it is rescinded by the board. The overall responsibility to oversee compliance functions should be assigned to the senior management of the company.The organization’s culture starts at the top.The program should then create and delegate clear authority for each group within the compliance structure, including the compliance officer, the compliance committee, employees and the board of directors. Senior management has the primary responsibility for the implementation of the compliance plan. As such, senior management must properly fund the program, provide leadership in implementing and integrating it, and be willing to evenly enforce it at all levels of the company. In Nevada, the gaming regulators include the Nevada Gaming Commission, the Nevada State Gaming Control Board, and all other regulatory authorities with jurisdiction over the company’s gaming business.The gaming regulators generally set the minimum standards for a compliance program, review and approve the program (after endorsement by the board of directors), and assist the company with the program’s implementation. All copies of the minutes, reports, exhibits and documents relating to items considered by the compliance committee must be provided to the gaming regulators for review and recommendation. Moreover, the gaming regulators are responsible for auditing the compliance program.This periodic review is significant in ensuring the compliance program continues to remain effective after its implementation.The review will consider a number of factors, including: Are the compliance controls working? Do the compliance controls adequately detect the types of regulatory violations and crimes to which the company is vulnerable? Has the compliance program been modified or adapted to take into account any known criminal or regulatory violations? And should the compliance program be reviewed or updated to reflect any new company or industry threats or to reflect best practices within the industry? The gaming authorities play a key role in the success of a compliance program.Accordingly, the compliance officer, compliance committee, board of directors and senior management will all benefit from establishing a working relationship with the gaming authorities.

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